Crude Swings

Retailers work through new norm of fuel-price volatility.

Randy Whitmore saw a moment of calm this past summer with three weeks of relatively stable fuel prices. That’s compared to earlier in the year, when he was seeing swings of up to 20 cents. Whitmore, owner of two-store Whitmore’s Airport Shell, Wadsworth, Ill., has become used to watching dramatic turns in crude-oil prices, at times having to place early-morning supply orders to avoid getting slammed by a sudden upswing.

“We try to get a load in before 6 p.m. because you get yesterday’s price,” he says. “After that, you [can] get hammered.”

Like other retailers and fuel distributors across the country, Whitmore has watched events both cataclysmic and mundane—from the earthquake in Japan to the disruption of Canadian supply— jolt gasoline street postings above $4 per gallon this spring for the first time in almost two years.

The tumult paralleled larger trends:

Higher crude prices overall. Counter to the dramatic, recession-provoked fall of crude to $30/bbl. in 2009, the return of $90 to $100 crude today is a more substantive high, fortified by what some believe to be true, sustained global demand.

A quiet but reactive public. Both consumers and retailers appear resigned to higher prices at the pump, with the return of $4 gasoline causing only a peep vs. three years ago, when prices first crossed that threshold. But with the silence came the deafening echo of softer domestic demand.

A speculative reality.

The price of crude has become irreparably tied to the purchase and sale of futures contracts, gaining an increasingly speculative tone that observers believe will become more and more removed from actual supply and demand.

The swift and seemingly arbitrary metronome swings in crude prices, even over a 24-hour period, has become today’s norm, says Brian Milne, energy editor for Telvent DTN, Omaha, Neb. In mid-summer, for instance, RBOB futures were trading in a 7-cent range. “Ten years ago, you’d see a 7-cent move the whole season,” he says. “Now it’s happening in a day.”

Fluctuations that severe began in the mid-2000s, but in just the past year they’ve gotten more frequent. Though 2010 was “definitely calmer,” Milne says 2011 has seen 4- to 5-cent changes almost daily.

Tracking 2011

This year’s fuel fluctuations seem synced up with global events. A February spike, for instance, corresponded with turmoil in the Middle East, which started in Tunisia and Egypt and has moved to Libya and Syria.

Though civil shudders continue in that part of the region, global markets have calmed down. On the West Coast, Tom Robinson, president of Robinson Oil Co., Santa Clara, Calif., says gasoline and diesel prices began a steady run-up beginning last September, rising $1.40 by spring; they’ve subsided steadily through the first part of summer.

Nebraskan jobber Fred Bosselman, president and CEO of Bosselman Energy Inc., says, “It’s just the news that creates the ups and downs, not supply.”

Nevertheless, even without a pipeline or other disruption, the price spikes, coupled with a lagging economy, have injured consumption. According to the Energy Information Administration (EIA), consumption was forecast to increase 0.5%, half of what demand growth was last year, at 1.3%.

There is some mildly good news as the c-store industry persists through what appears to be chronically higher street prices. “Finally,” says PMAA president Dan Gilligan, “the public began to understand that [retailers] are at the end of the spigot and have very little to do with high prices.”

Gilligan says industry groups, along with the American Automobile Association (AAA), Heathrow, Fla., helped educate consumers about the channel’s 8- to 12-cent margins and how “the retailer is struggling to survive as well.”

As surprising as the motoring public’s silence has been in 2011, Gilligan says there was an even greater silence from his members. “In 2008, some [retailers] with interstate locations told me they were seeing drops of 10, 15, 20% in volume when prices went over $4,” he says. “This time around I haven’t heard any of those complaints.”

That’s not to say demand destruction did not occur, he says, citing that February, March and April saw significant dips in demand: “You have to believe some retailers saw a 10% to 12% drop in volume.” (See sidebar, above.)

Price Triggers

Today’s malaise in domestic demand follows what Milne of Telvent DTN calls the “biggest year-on-year growth in fuel demand that we’ve seen in a long time.” Globally, depressed levels of demand in 2009 rose significantly in 2010, driven by emerging economies in China and India. However, demand forecasts domestically started high but changed as 2011 began to play out.

“We hit a headwind,” Milne says, with gross domestic product (GDP) failing to grow as rapidly as predicted and prompting many in government to pare back original estimates.

Coupled with the ailing economy are a number of world events, many of which jostled crude prices:

Japan’s earthquake and tsunami. One of the lasting effects of this disaster was its effect on nuclear power, Milne says. Though the expected financial reaction would be bearish, Japan today has a shortage of electricity and must use different types of fuel as well as practice conservation. Milne says that extra demand on power plants for air conditioning, manufacturing and the larger rebuilding process has increased overall demand.

“Arab spring.”Turmoil in the Middle East, punctuated by civil unrest in oil-producing Libya, initially sent crude prices higher, raising questions of supply. But the effect was mixed, according to Tom Kloza, chief oil analyst for Oil Price Information Service (OPIS), Wall, N.J. Chaos in Libya, he says, kept global crude at $110 to $120, but domestic crude prices stayed in the range of $90 to $100; that benefited Midwest refineries, which saw margins of up to 50 cents per gallon.

Debt-ceiling debate. Though resolved by press time, the political impasse to raise the nation’s debt ceiling sent global and domestic tremors across financial markets, Kloza and Milne agree.

Federal Reserve’s monetary policy. Actions by the Federal Reserve to keep interest rates low ultimately weaken the U.S. dollar, Milne says. Because crude trades on dollars, the price rises as the value of the dollar falls. “There’s a tight connection to watching dollar movements with oil,” he says, pointing out that in mid-summer, crude went over $100 for the first time since June on news of the dollar weakening. Hartman of Rutter’s agrees: “Where is the dollar going? When the dollar goes down, gas goes up.”

Strategic Petroleum Reserves (SPR). News of President Obama’s intent to release oil from the nation’s reserves sparked a short drift downward in prices but essentially had little effect, with Kloza saying “speculative money is coming back into crude.”

No hurricanes … so far. Though just entering the fall “season,” hurricanes have not played the kind of disruptive role they have in the past. Tornadoes and other natural disasters, such as what occurred in Joplin, Mo., this year have wreaked local devastation, but they did not affect oil supplies in the manner of Hurricanes Katrina and Rita.

For the most part, experts see emerging economies in China, India and the Middle East driving demand for the next couple of years. “There are reports that manufacturing slowed down in China and that people are expecting [their growth] to come off the tracks and tumble,” Milne says. “I don’t expect that. It may be slower growth, but these countries are spending a lot to develop their infrastructure. They don’t use [energy] as efficiently as developed countries. That will continue to drive [demand].”

Better Margins?

With retailers having to respond quickly to price changes, the question of margins and profitability comes into play. In a CSP Daily News poll taken in midsummer, about a quarter believed that margins were better this year than last. A little less than half believed margins were about the same. (See chart, above.) Michael Zielinski, president and CEO of Lisle, Ill.-based Royal Buying Group, says despite times of the year when margins thin out, the overall averages have been trending upward for the past two years.

“You could say that the increase in gasoline prices ultimately leads to higher margins over the course of the year,” he says. “But the detraction comes with additional credit-card costs.”

Data from recent NACS® State of the Industry reports puts margins on the recovery path from a high in 2008 of 18 cents per gallon. The year 2009 saw a drop to 13.8 cents and then a twocent recovery up to 15.8 cents in 2010, according to preliminary numbers.

Zielinski says retailers have told him that margin increases do not make up for what it costs to pay credit-card fees and operate their businesses. “

And it’s definitely the upper-quartile stores that have been able to handle the volatility better than lower-quartile,” he says. “It’s because they’re a lot less dependent on gasoline margins and continue to invest in foodservice and other profitable categories.”

The Future: Higher Prices

Barring any significant hurricane or international event, fuel prices will most likely remain stable through the fall, with pressures for summer-grade fuel easing up, Kloza says. Prices for the year probably topped out this past spring at $3.99 a gallon nationally.

But then toward the end of 2011 and into the first quarter of 2012, “we’ll be off to the races,” says Kloza. Fear of what may happen in the Middle East coupled with a perception of rising global demand will set up a rally that will go through the beginning of May. “I would guess that all-time highs for gasoline will be exceeded in the spring of 2012 just briefly, with a sloppy, drunken festival where numbers won’t be sustained,” he says. “But if you think gasoline made headlines in the spring of 2011, it’s going to be front page again.”

High Gas Prices Hammer Traffic

Unfortunately, high gasoline prices this past spring had a negative effect on stores, with inside traffic falling 4% in the second quarter of 2011 compared to last year, says David Portalatin, director of industry analysis for The NPD Group, Port Washington, N.Y. Tied to high gasoline prices, the drop is “consistent with well-established patterns,” he says. “But the consumer did spend a little more when they did visit, so total dollars is up about 2%.” He framed his thoughts by saying industry averages don’t tell the whole story. “Some retailers were more adversely impacted than others,” he says. “Traditional chains with a more diversified offer independent of gasoline are more insulated against this trend.”

Plunge in oil prices sets the stage for record margins and boost in in-store sales. Also In This Issue: Profitability skyrockets for top performers! Other channels seek to redefine convenience! The economy enters a new stage. The growing health-and-wellness trend. Fuel demand; oil's slide; multicultural momentum; and data, data, data!

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